microeconomics

1

Diagram 1 : The production schedule of firm `W

From the diagram above and the information given , we can infer that the opportunity cost of producing 20 cakes is going to be small , though it will vary for the different segments of the production schedule . If 500 cakes are produced the firms entire resources are allocated to the production of cakes , a fact evident in that no tractors are produced . If the number of cakes falls by 100 , the remaining resources that are allocated to the production of tractors can make 10

tractors . So , for this range it can be inferred that every reduction by 10 cakes is able to release resources able to produce 1 tractor . So the opportunity cost of producing 20 cakes is a reduction of of 2 tractors . However , evidently the production schedule is non monotonic in nature and thus the opportunity costs of cakes will vary in each of the separate segments . For the next segment , an aggregative reduction of 150 cakes is required to increase the number of tractors produced by 10 . So for this segment a reduction of production by the amount of 15 cakes is required to release enough resources to produce 1 additional tractor . Thus the opportunity cost of producing 20 cakes is less than 2 tractors in this segment . In the lowest segment , we find that a reduction by 240 cakes is able to produce 20 additional tractors Thus for every 12 cakes not produced , one tractor can be produced . So in this segment also the opportunity cost of producing 20 cakes will be less than 2 tractors

Evidently , the combination of 300 cakes and 30 tractors is not feasible It lies beyond the production possibility frontier . The combination has been marked in red in the diagram . Since only 250 cakes can be produced if the number of tractors is 20 , and in the number of either is increased the number of the other has to necessarily fall given the present technological constraint , 300 cakes and 30 tractors is a combination that is not plausible

To obtain an outward shift in the production possibility frontier , the firm has to improve its technology so that more of both goods can be produced with a given amount of resources

The PPF will shift inward if the firm for some reason faces a fall in productivity of the resources

2 . Assuming price of chocolate to be represented by `P , the given equations can be rewritten as

P 20-x and

4x . Now in equilibrium ,

20-x 4x 5x 20 x 4 which is the equilibrium quantity and putting x 4 we get from the demand function

16 which represents the equilibrium price

Diagram 2 : The market equilibrium

In the diagram above , the equilibrium is shown graphically . Observe the demand curve satisfies the equation